Ben Bernanke says it would be a “huge calamity”. I say it would be a salutary expedient.
If the United States Congress refuses to raise the government’s $14.3 trillion debt ceiling by August 2, the Obama administration will be forced to put American finances on a more stable path. It needs to be forced because no reason or evidence will cure the US government of its debt fetish.
The US budget deficit in 2011 will be 9.8% of GDP, proportionately bigger than Greece’s. If Australia’s entire national income were devoted to one end, it could not plug the gap between US revenue and expenses. The Congressional Budget Office, an impartial economic forecaster, reckons the US is facing a ratio of 190% by 2035 unless the government makes “large and rapid policy changes”.
The hysteria accompanying the scramble to lift the debt ceiling is misplaced and self-serving. The US would not have to default on its loans, domestic or foreign, come August 2. And the supposed cost to the economy of big spending cuts is based on the delusion that deficit financing is a path to prosperity.
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Total US government debt, at 69% of GDP, is still far lower than it was after World War II. Net interest payments mop up less than 12% of US government revenues, less than they did during the 1980s, for instance. The US can still borrow for 10 years at 3% — try getting a mortgage for that.
A cap on total debt would instead mean cutting wasteful and costly programs. The major US entitlement programs, Medicare, Medicaid and Social Security are unsustainable. The gargantuan US military absorbs 29% of US revenues, and needs a thorough cost-benefit analysis too.
Nevertheless, bureaucrats and politicians appear hell-bent on continuing the debt-fuelled spending orgy, whatever the cost to the United States’ ultimate prosperity or esteem. The debt binge underwrites their failed “stimulus” policies. As American journalist Henry Hazlitt put it in 1946, “deficit spending, once embarked on, creates powerful vested interests which demand its continuance under all conditions”.
Whatever their faults, the American people are overwhelmingly opposed to more debt. Polls show only about one fifth want the debt ceiling increased. They understand the St Augustine approach to fiscal retrenchment — we’ll do it later — can’t be taken seriously. President Obama’s 2012 budget plans, for instance, will see US debt spiral to $20.8 trillion, or 87% of GDP, by 2021.
Debt at those levels is unlikely to be serviceable. As Adam Smith observed, “when national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid.” The only way to repay debt at such levels is destroy the value of the currency, a strategy the US government appears to be vigorously pursuing already as it ponder another round of money creation (sorry, QE3).
Democrats want to see tax increases to narrow the deficit, but they will only lead to greater spending. One study prepared by the Joint Economic Committee of Congress showed that between 1947 and 1991 every dollar of additional taxation lead to an extra $1.59 of spending. Republican senators and congressmen are right to oppose any increase in the debt ceiling and any increase in the tax burden.
Fear mongering will probably succeed in pushing up the debt ceiling before August 2. No one wants to be responsible for a US “default”. Politicians calculate that any fallout from increased borrowing will occur on somebody else’s watch. And cutting programs in the lead up to the 2012 presidential election is politically difficult.
Nevertheless, that increasing the debt limit this time is creating such a furore — it has increased more than 100 times since its introduction in 1917 with less fuss — is a good sign that acceptance of mounting debt is flagging among politicians and voters. A debt freeze is only a calamity for a political and economic class beholden to stupid ideas and desperate to postpone their consequences.